China shakes the world

The headline from China’s ‘two sessions’ meetings over the past week was the (optimistic) ‘around 5%’ GDP growth target for 2024.  But also of significance was the ongoing commitment to ‘high quality growth’, with a focus on industrial sectors and advanced technologies. 

There is an aversion to consumption-driven growth, with little increase in fiscal stimulus or reforms to the social insurance system.  Export-oriented industrial growth will be an important contributor to achieving the ~5% GDP growth target. Indeed, there is an ongoing rotation away from the property sector as a driver of growth: bank lending into real estate is declining while increasing into industry.

Relatively weak domestic demand in China (national savings are >40% of GDP), and the sectors in which China is developing positions of strength, mean that export markets are the vent for surplus.  China is now the world’s largest car exporter (overtaking Japan last year) and is a major player in renewables (solar, turbines, batteries).  China remains the world’s manufacturing superpower, accounting for ~30% of global manufacturing value added. 

And China is determined to maintain this leading position, with significant support flowing into priority sectors (such as EVs, AI, renewables).  Substantial over-capacity has been built in a range of Chinese industrial sectors.  This will generate a meaningful deflationary impulse into the global economy: China’s export price index was down ~8.4% in the year to December.

Surplus economy

As the world’s largest exporter (~15% of world merchandise exports), China’s export-oriented industrial policies will have a meaningful impact on the global economy.  After a period of decline, China’s exports/GDP ratio has increased recently, and is back to 2017 levels.  Net exports have made a material contributor to China’s GDP growth over the past few years.

The full note is available at: https://davidskilling.substack.com/p/china-shakes-the-world